Monday, 5 February 2018

Financial Regulation Matters is a Year Old: Some Updates

Yesterday Financial
Regulation Matters was a year old and, coincidentally, a number of stories
covered throughout the first year of the blog have had some significant
developments over the past few days; so, in today’s post, we will have a whistle-stop
tour of these developments and ask how the recent developments may impact upon
a number of parties concerned with these impactful business stories.

Nevertheless, how this development affects South Korean
business and politics is still to be decided with a number of aspects still to
be played out. For example, will Samsung (via Mr Lee) now attempt to repair the
reputational damage done to it and other chaebols, or will it simply continue
down the same path on the back of what has been particularly lenient
punishment? The backlash felt against the political and business structures
within the country suggests that Samsung must now embark upon a concerted
campaign to distance itself from the murky waters of South Korea’s elite, but
doing so is much easier said than done. Additionally, any attempts to do so
must be genuine and forward-looking, because the consequences for not doing so
i.e. conducting a superficial PR campaign in the wake of Mr Lee’s release, may
cause lasting damage to the social fabric within the country, such is the
importance of the chaebols to South Korea and its make-up.

We have looked at the continuing struggles of the American banking
giant Wells Fargo on a number of occasions: firstly with the discussion about
its attempts to repair the massive reputational damage suffered from the ‘fake
accounts’ scandal that has consumed the Bank’s organisational responsibilities;
we then looked at the effects of the news that original predictions for the
amount of fake accounts created was conservative, with millions
more predicted and confirmed. As the Bank continues to struggle, news today
from the Federal Reserve (Fed) is having a massive impact upon the bank’s
fortunes, with the Fed prohibiting
the bank from growing past its $1.95 trillion in assets. This unusual (and,
arguably, sensible [although there are clear counterarguments]) approach has
caused massive waves within the banking and financial communities, with Wells
Fargo CEO stating that the move will cut the bank’s annual profit by almost $300
million, potentially rising to $400 million; whilst this figure is
particularly insignificant in terms of losses for an organisation this large,
the fear is that to be regulatory restrained within the current climate could
lead to massive losses in light of the growing influence and profitability of
the bank’s major competitors. TheNew York Times discussed today how the
aim of the move is to hold
the bank’s Board accountable, because the prohibition can only be lifted
once the company demonstrates that it has created and implemented new and more
effective corporate governance controls. Yet, the obvious response to this move
was one of panic, relatively speaking, within the marketplace, with its shares plunging
almost 8% on the back of the news, and a number of advisory firms
downgrading the viability of investment within Wells Fargo shares. However,
there are a number of considerations to be had with respect to the Fed’s ‘cease-and-desist’
order today, with the underlying issue being one of sentiment.

The real question is what is the Fed’s sentiment in
appropriating the cease-and-desist order, and will it hold under pressure? This
is a potential issue because if the sceptics are right, and the bank starts to
lose substantial ground to its competitors because of the order, then what
happens if the bank starts to fail? The Fed will then be faced with the
prospect of either (a) letting the bank fail because of its poor governance
standards and lending real legitimacy to its enforcement actions, or (b) caving
under the pressure of a colossal failure and, at once, fundamentally
legitimising and confirming the presence of ‘too-big-to-fail’. It is worth
noting that the superficial sentiment of the Fed’s actions is a positive one,
because it will likely force an organisation that has proven to be inadequate
in terms of its internal governance procedures to make radical changes, but if
the bank and its board calls the Fed’s bluff, the whole scenario could turn
into something rather monumental in an instant.

One clear effect is that one can extract from these events,
and how they have been reported, that the financial data i.e. what you can ‘sell’
or promote, is all important whilst protecting jobs is far from high on the
priorities of these socially important organisations. In the current climate,
positivity is worth more than almost anything and, in developing this narrative
of strong data trumping almost everything, the positive spin is being systemically
cultivated. The obvious thing to say on the back of that is that perhaps this
has always been the way, but that does not mean that it is correct. In
uncertain times, as these surely are, some sense of job security should be
aimed for by these massive employers, but quite often the opposite is true;
whilst technological advances are indeed making many of the workforce obsolete,
the impact of that within the current climate is significant because the
safety-net for those removed from the workforce is being constantly deteriorated
– a show of support for employees from Governmental entities would be
particularly welcome, but it is unlikely.

** As the blog is a year old, I would like to take this
opportunity to sincerely thank everybody for their support over the past year;
the readers, followers, supporters, and contributors, are all very much valued
by the blog and the aim now for year 2 is for the blog to go from strength to
strength with your continued support. If there is something that you would like
to comment on for the blog, your contribution would be most welcome!

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Contributions are welcome to this blog. If you would like to contribute regarding any area of financial regulation, then please feel free to email me and submit your blog entry. The content should be concerned with financial regulation, and why it matters, but this is broadly defined. The blog is open to all who are professionally concerned with financial regulation, which may range from an Undergraduate Student interested in writing on the subject, to Professors and industry participants.